Investing In Video Games: Virtual Estate

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Forge Your Wealth is meant for education and entertainment and should not be used for financial advice.

“Video games will get you no where in life.” You have probably heard these words all the time, probably from your parents. However, the video game industry made $152.1 billion in 2019. With 2.5 billion video game players around the world, that’s hardly surprising. Every gamer spent only on average of $61 that year. Compare that to the thousands you would spend eating out, on alcohol, or the hundreds to over a thousand on coffee annually.

Variety predicted that the video game industry would grow to around $300 billion. This is thanks to the increase of mobile gaming, who doesn’t spend an hour or so playing a game on their phone? And guess what, young people are far from the only ones who play them according to popular opinions. In fact, people over 55 years of age make the largest demographic of mobile video games at around a quarter of the total game players. In other words, video games are becoming a very large business, and every demographic is supporting its growth. This has opened a new investment platform: investing in video games.

Is Investing In Video Games Over Hyped?

With things going on throughout the world, many people are on lock down. They cannot spend their free time at bars, restaurants, or even coffee shops, at least not like people normally could. Now there are fewer options of what to do with your free time. You can read, write, watch shows/movies, cook, workout, some other things that may not be appropriate to talk about.

Oh, and video games. How could I forget the form of consumable media that all but literally takes you throughout the world and to a few fantastical ones as well? While books and videos can take you to different worlds, you cannot interact with them like you can on even the most passive video game. That is what has appealed to many gamers, myself included. Many others have seen the appeal since they are now restrained within 4 walls.

Video Game Industries Have Exploded In Growth

One of the few things that have increased in sales over the last several weeks including bleach was video games. Video game sales have increased by 63% since the pandemic started. These include video games consoles and new games. It’s no wonder people are talking about investing in video games. They have mass appeal, and are growing much faster than even the most optimistic video game enthusiasts believed. In the first quarter of 2020, many video game stocks had a significant increase in price.

There are many video game companies, and believe it or not, there is such a thing as a fund for video games. This is the Vaneck Vectors ETF Trust Video Gaming And eSports ETF (ESPO). The ESPO increased by over 14% since the start of 2020 and still shows signs of growing. Compare that to the more than 10% drop in the S&P 500 with questionable signs of growth. That being said, people have been talking about investing in video games so these investments are higher valued than they were last year. Look at the financial statement information of video games stocks to determine if you think the valuation is favorable.

Ways To Invest In Video Games

Aside from the ESPO ETF there are many ways to invest in video games. ESPO is one of the closest things I know to a total market fund in the video game sector. There are generally three branches in the video game industry: video game studios, eSports teams, and infrastructure.

Video Game Studios

The bread and butter of the video game industry. These companies develop and sell video games. Without them, there is no video game industry. Some of these industries are very much like blue chip stocks. It almost does not matter what they develop, they will always produce a product that will sell. You know exactly which companies and products I am talking about. However, there are many studios that came from no where to take the world by storm. Take Epic, the creators of Fortnite for instance, who would’ve thought the studio that brought you a few good games would impact the world the way it did. It now has a valuation of $15 billion, qualifying it as a large cap valuation. It’s no wonder Fortnite took the world by storm, especially in eSports.

eSports

Speaking of eSports, eSports has increased immensely. While they have been around ever since before Mario, eSports has developed revenue of $1.6 billion. Compare that to the $13 billion produced by the NFL, aka the largest sport league by revenue. It’s not very large, but it is very noticeable, especially since it did not have 100+ years to mature. Whether you support these “athletes” or not, eSports is here to stay. With people isolating themselves and sporting events all but completely cancelled, eSports is all but guaranteed to rise in popularity.

Infrastructure

eSports and in some cases video games would not exist without the new technology to support them. These include streaming and media platforms including Twitch and Discord. But they also include game engines such as Unreal Engine, the very game engine that brought Epic into the light. These types of investments have no limits to what games nor teams can use them though. These are much like the utilities in the video games industry, everyone involved in the industry uses them. However, unlike utilities like electricity and water, most people do not require them.

The Video Game Industry Will Grow Further

The video game industry will grow much faster than previously imagined, especially with a crisis that locked down many people. However, it will not be in the traditional direction. The days in which people developed massive games and made revenue on sales alone is all but over. Forget about just downloadable content (extensions of video games), some video games have subscriptions, online passes, micro-transactions, and loot boxes. Now video games can make more money than from just their retail price, although some people are angry about some of these methods. Some of the anger is not undeserved, I will get into that later.

New Methods Of Playing

Remember the days when you could only play video games in an arcade? They could only house so many players and the only others who could play video games tended to have high computer expertise. When game consoles became a thing, anyone could play at home. But how many could afford those consoles? Not too many. What about computers? Many people had personal computers even with rather high prices because they were not used for just gaming. What about smartphones? They’re not too un-affordable nor undesirable considering the fact that over 81% of Americans own one, more than even those who own a computer. It could be argued that almost everyone has a method of playing video games, key word being almost.

Cloud Gaming

One of the most talked about innovations in the video game industry, and many industries is the capability of streaming video games or cloud gaming. Imagine playing video games not via physical games nor downloaded games, but video games that exist on a remote server and are played via a device with a screen. Imagine it as a Netflix for video games. You only need to pay for a subscription to obtain access to many games. This may further close the gap of potential gamers while providing a new breakout product.

Current Services

There are many platforms to use cloud gaming now including Google Stadia and Playstation Now. However, none of these services can be accurately described as the Netflix of video gaming, at least not yet. Stadia requires the subscription and the full price of the video game you want to play. Which begs the question of why bother? If you have to pay full price for the game with the subscription service it is not exactly like Netflix.

Arguably, the closest current service that could be pretty accurately compared to Netflix for gaming is Playstation Now, but there are still problems with it. However, many of these problems are the same thing you could expect from any streaming service, especially at the start. There are so many options with so few blockbusters people actually want to consume, my wife noticed some lagging when she tried, and the monthly cost did not give it an economical edge as many other options, at least not at first.

Cloud Gaming Needs Development

Like any other streaming services, there is much needed to develop in cloud gaming. This is especially true for video gaming because music and video streaming only requires so much input and output. Music has only so many measures and videos only have so many frames. Video games must respond to constant input from the user and output pretty much infinite permutations of responses. While the technology is present for cloud gaming using current cloud technologies and configurations may not suffice for what it could bring out. Using our current technology for cloud gaming is like trying to use a Model T to drive across the US. While it is achievable, you will be in for a bumpy ride (to say the least).

Large Potential Consumer Pool

That is why many companies have invested money into developing cloud gaming platforms and technology. If you have invested in practically any tech stock or mutual fund, you probably own a company working on cloud gaming platforms. But how impacting will cloud gaming be? Well, think of this, how much have you paid for Netflix or any other video streaming service? Even the most economical options cost only a little less than $100 each year.

If you are an American, there is a 74% chance you subscribed to at least one video streaming service. Keep in mind, this study was published before Disney+ which all but certainly increased that percentage. That is over 200 million subscribers, if the service is $100 per year that would be $20 billion in revenue each year, and that is assuming there is no revenue from advertising.

There is almost the exact same chance you are a gamer. As long as the video game content is good, people would probably be more likely to pay close to a hundred dollars for access to many games versus the same amount for at most several games, more likely two. Video streaming became a multi-billion dollar industry no one expected. The difference with cloud gaming is it is a bit more expected. Even if you do not see investing in video games as a good idea, maybe a new type of industry could be more within your ballpark.

The Video Game Industry Is Also In Trouble

While the video game industry is growing incredibly, there are some who are also afraid of it receding. It is worth mentioning that I cannot see the video game industry disappearing or even crashing hard. Even during the recession of 2008 people have played more video games, albeit more used and rented than the newest titles. Check out a previous post about how video games sell well during tough times. Video games may be something people turn to even during the most troubling times. If electricity is flowing, so is money into the video game industry. So what could threaten an industry that is not severely affected by a lack of economic security? How about itself?

Lack Of Innovation

Much like the cinema, many video game studios seem to lack innovation. While many of the blockbusters are hits and bring in good money, many gamers are pointing out that some games are too similar and new features are becoming rarer and rarer.

I’m not going to lie, I think this is mostly the fault of the gamers’ including myself. What was the most popular game in 2019? Call Of Duty. The poster child of unoriginal games and the butt end of jokes of “reskinning games.” If gamers are really tired of the same old thing, they are not putting their money where their mouth is.

Consider Death Stranding, one of the most hyped, and frankly still one of the best games of 2019. It has received mixed reviews, and for a game that was “beautiful” and certainly not unoriginal. But it was still lacking. Death Stranding was a large risk, it may have paid off somewhat, but other studios may not see taking such risks as worth while. After all, Death Stranding was created by Hideo Kojima, a legend, one of the main reasons for the hype and the success.

It is not the responsibility of consumers to purchase any products, but markets will always respond to consumers. Studios may produce more of what is safe than something that will push boundaries. While gamers may purchase these unoriginal games now, it is likely gamers will not put more money to the same thing over and over. And innovation may be accidental, but it is also not spontaneous. Effort needs to be put in to push boundaries. If boundaries are no longer pushed, the gaming industry will not grow much more and investing in video games may not be a good avenue for investors.

Regulation

Video gaming is a rather new industry that has pushed some boundaries in the economy, especially recently. Now governments are trying to add new regulations, for better and for worse. One such regulation involves regulating video game gambling similar to how it would be regulated in a casino, a regulation I actually welcome. On the opposite end, you have governments banning video games to add communication restrictions before a relaunch. Regulation is always a double edged blade and the question should be brought up if certain studios can survive such regulations much less grow. This may dull the appeal of investing in video games.

Final Thoughts

Investing in video games may seem like a good avenue to go down. It has a history of growth and resistance to troubling times. The video gaming industry is not likely to be brought down by the markets, but by itself. Most industries look for innovation, but video game industries just appear to be looking more for the next paycheck versus the next innovation. When I look for an industry to invest in, I do not just look at the financial statements, but to the innovations that industry plans to produce. I believe innovation is always the key to the growth of businesses. It should never fully stagnate, otherwise it will likely fall.

I believe that the companies developing video games are relying a little too much on formulas that have and frankly still do work. These formulas certainly work for the world we live in now. However, the world is constantly changing. If those formulas are not changed, investing in video games may not be the best path to forge your wealth in the long haul. However, the cloud gaming platforms may be worth a look into. But let’s be honest, if you have invested in any stocks, you all but certainly invested in cloud gaming. It may be the next breakout technology that only self-driving cars could surpass.

Author: Papa Foxtrot

Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances.
I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.
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